Another shipping emissions cost system on the drawing board
On 6 September, the International Chamber of Shipping (ICS) proposed a global carbon levy to finance decarbonization of the international maritime fleet. It also used the opportunity to criticize the EU Commission’s proposal to place shipping under the EU Emission Trading System.
The key questions that will define the credibility of the ICS carbon levy suggestion were, however, unanswered.
ICS proposes global shipping industry CO2 tax, slams EU ETS inclusion
Responding to the EU Commission’s proposal from 14 July to include the maritime sector into the EU Emission Trading System (EU ETS), on 6 September the International Chamber of Shipping (ICS) proposed plans for a global carbon levy to expedite decarbonization in the shipping industry. According to papers handed to the International Maritime Organisation (IMO), the levy would be based on mandatory contributions by ships trading globally, exceeding 5,000 gross tonnage, for each tonne of CO2 emitted. The money would go into an ‘IMO Climate Fund’ which would be used to deploy the bunkering infrastructure required in ports throughout the world to supply fuels such as hydrogen and ammonia. The Fund would calculate the climate contributions to be made by ships, collect the contributions, and give evidence they have been made.
The ICS also took the opportunity to criticize the EU Commission proposal. The ICS believes that a mandatory global levy-based system is strongly preferable over any unilateral, regional system that “will ultimately fail to reduce global emissions from international shipping to the extent required by the Paris Agreement, whilst significantly complicating the conduct of maritime trade”. Furthermore, the ICS stresses that adopting its proposal for a levy-based system will avoid the volatility that exists under emissions trading systems, such as the EU ETS. According to the ICS, a levy-based system can give the industry price certainty, and more stability for making investment decisions in zero-carbon ships and developing emissions saving technology.
EU likely to shrug off symbolic global carbon levy
While highlighting the benefits of a global carbon levy, the ICS has left the two most important questions unanswered:
1) When will the system be implemented?
2) What is the indicative price level per tonne CO2 emitted?
For the credibility of the ICS proposal and for the plan to be in line with the Paris Agreement, the levy price level should be set at or around the marginal abatement cost of low- and no-carbon shipping fuels. If the emission cost is set at a level that does not drive emission reductions but primarily generates revenue to the ‘IMO Climate Fund’ that will finance emission reductions sometime in the future, the system is likely to be labeled too unambitious by the EU and will most likely not be seen as a potential replacement to the EU Commission proposal. The EU Commission has already highlighted that the proposal to place shipping under the EU ETS comes because of insufficient action from the IMO to decarbonize the international shipping fleet. On the ICS’ concern of volatile European carbon prices, the EU Commission in May expressed discontent with the then-record-high prices of €50/tonne and said prices in the world’s second largest carbon market must go even higher to meet EU’s stricter emission reduction goals. European carbon is currently trading above €60/tonne.
Strong support for an EU ETS compliant shipping sector
While it is still way too early to conclude whether the European shipping industry will be included in the EU ETS, several factors indicate that this could be one of the easier wins in the Commission’s proposal to revise the EU ETS.
Firstly, the EU Commission has strong support in the EU Parliament for decarbonizing the shipping industry. On 16 September last year, a vast majority of the EU Parliament passed the position that ships of 5,000 gross tonnage and above should be included in the EU ETS. Furthermore, the parliament position states that market-based emissions reduction policies are not enough and request that shipping companies reduce their annual average CO2 emissions per transport unit for all their ships by at least 40% by 2030. The adoption passed with 520 votes to 94 and 77 abstentions, indicating a solid backing from the EU Parliament.
Secondly, the EU Commission and EU Parliament have at several occasions explicitly expressed its discontent with the decarbonization progress from IMO. The proposal from 14 July is based on one of the most ambitious alternatives that the Commission presented in the 2030 Climate Target Plan and accompanying Impact Assessment in September 2020: To add emission costs not only on intra-EU maritime voyages but also on 50% of extra-EU maritime activity. The EU Commission seems aware that the strong support around greening the European shipping industry provides it more leverage in its approach to curb emissions from the sector. As with IMO, the EU is likely to rebuke any half-hearted attempt from the ICS to decarbonize the international maritime industry.
Thirdly, inclusion of the maritime sector in the EU ETS is far from the most controversial suggestion in the EU ETS revision proposal. The inclusion will add only around 6% demand to the cap-and-trade system and is not considered a ground shaking change to the ETS. The proposal is meeting resistance from parts of the shipping sector, but it does not directly impact the general opinion in the EU. Inclusion of road transportation and buildings emissions into the emission trading schemes, on the other hand, are considered far more toxic items in the proposal. An emission cost on these sectors will impact citizens in all EU member states, while a carbon cost on shipping is likely to meet opposition predominantly from maritime-heavy member states such as Greece, Cyprus and the Netherlands. The opposition against the proposal in the EU Council is likely to be far weaker compared to the opposition against an emission cost on road transportation and buildings. The result from the negotiations in and between the EU Parliament and EU Council over the next year(s) could therefore be that plans such as placing road transportation and building under the EU ETS are used as bargaining chips to gain other wins such as adding a direct cost to shipping emissions.
Writing on the wall: Carbon cost is coming in some shape or form
For the ICS proposal of a global carbon levy on shipping emissions to gain acceptance in the EU, it must convince the block that it is as ambitious and efficient in decarbonizing the industry as the Commission’s proposal to place shipping under the EU ETS. Or else, the EU is likely to push forward with the current plan put forward by the EU Commission and consider the ICS proposal as noise.
From the standpoint of the European shipping sector, the outcome would be very much the same. Either it will be exposed to a carbon cost applied by the EU for European waters, or by the ICS/IMO system for operations globally. The main differences between the two systems are that the timing and approximate price level under an EU-system are known, while these are key unknowns under the current ICS global carbon levy proposal.